THE EFFECT OF COMMUNITY SOCIAL CAPITAL ON NON-PROFITS’ GOVERNANCE AND DISCLOSURE QUALITY

Social capital is critical to the entities' disciplinary environment and the ability to produce high quality financial reports. Although prior literature on for-profit setting indicates that social capital impacts both governance (Ferris, et al., 2017) and financial reporting quality (Jha & Chen, 2015; Jha, 2019), this area has received less attention in non-profit literature. The purpose of this dissertation is to examine the impact of the social capital of a non-profit organization's (NPO) headquarter area (also known as community social capital) on the NPO governance and disclosure quality (i.e., the quality of Form 990).
The study hypothesizes and finds that the community social capital of an NPO headquarter area has a positive impact on its governance. The positive relationship suggests that NPO social capital and governance play a complementary role, where managers in high social capital face strong disciplinary environment and enjoy strong social connections and professional reputations and thus have fewer incentives to resist the adoption of sound governance practices. Similarly, the study also hypothesizes and finds that the community social capital of an NPO headquarter area has a positive impact on its disclosure quality. This finding suggests that community social capital disciplines NPO self-interested managers' behavior to manipulate financial numbers in Form 990 disclosures.